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Thursday, April 17, 2014

Russia's Ukraine Arsenal Includes U.S. Bonds

Figures this week showing that Russia has cut its Treasuries holdings to the lowest level since 2011 are a reminder that U.S. finances depend on the kindness of strangers.

The U.S. government owes its foreign creditors $5.885 trillion, or roughly a third of the country's total public debt. The U.S. is now twice as reliant on foreign money as it was six years ago.

Uncle Sam's overseas obligations have crept inexorably higher, as other nations have mopped up Treasury bonds for their foreign-exchange reserves. A 28 percent increase in 2008 was followed by 20 percent in 2009, another 20 percent in 2010, a relatively modest 13 percent in 2011, another deceleration to 11.3 percent in 2012, and a positively parsimonious 3 percent last year.

Russia reduced its U.S. government bond investments to $126.2 billion in February, down from $131.8 billion the previous month and from almost $150 billion as recently as October, according to data from the U.S. Treasury department.

It isn't likely that Russia has been dumping debt in retaliation against the sanctions imposed by the U.S. in response to President Vladimir Putin's annexation of Crimea. There is a chance, however, that Moscow is dipping into its savings to help fund its adventures in Ukraine; Russia just had its eighth bond-sale cancellation this year as investors shun its auction attempts.

These days, geopolitical conflicts aren't just fought on battlefields, or indeed in cyberspace. As both Russia and Ukraine are finding, the currency and interest-rate markets offer new fronts on which wars can be fought.

Which is why the magnitude of the U.S. reliance on foreign governments for funding should give pause. A relatively paltry $126 billion wouldn't give Russia much clout in the Treasury market even if it wanted to use it to retaliate against U.S. sanctions.

Imagine, though, what might happen in the event of a confrontation between the U.S. and China. The $1.3 trillion of Treasuries in Beijing's back pocket might rapidly start to look like more like a weapon than an investment.